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Strategic choices in technology management: lessons from biotechnology.

Technological innovation has long been recognized as a significant contributor to economic growth. It has also been widely discussed as an important competitive force with significant strategic implications for individual companies, entire industries, and even countries. This paper summarizes selected results from an ongoing longitudinal study of the strategic choices made by established and emerging firms participating in the commercialization of new industrial technology. The ongoing biotechnology revolution provides an ideal context for this research because of the major technological changes in progress, the wide range of industries likely to be affected, and the rich variety of strategies being pursued by current and potential competitors in this new field.

The Biotechnology Revolution

Recent scientific and technical developments in recombinant DNA, hybridoma and associated technologies mark a major technological discontinuity in the evolution of the biological and chemical sciences. Though only in its emergent stage of evolution, the strategic importance of this emerging technology is apparent. As noted in one study of international competitiveness in biotechnology, "companies or countries that lead in this developing field could gain a significant competitive edge over others because products are expected to be manufactured at lower cost, at higher purity, in larger quantifies, and with decreased pollution and energy consumption.|1~ The strategies by which participants position themselves in the technologies and markets associated with biotechnology's future will help to determine the ultimate winners in this international competition.

Broadly defined, biotechnology is "the application of biological organisms, systems or processes to manufacturing and service industries.|2~ Biological organisms and processes have been applied throughout history in baking, brewing and agriculture. The appearance of antibiotics in the 1940's reflected the increasing sophistication of the biological sciences, particularly microbiology, biochemistry and microbial genetics. However, from the time the first gene was cloned successfully in 1973, attention has focused on the "new" generation of biotechnology, encompassing the techniques of genetic engineering, hybridomas and biochemical engineering. Dramatic advances have been made in understanding and applying this new technology, and the current rapid pace of technological innovation is expected to continue well into the next century.

Even the most conservative estimates of commercial impact assume widespread biotechnology applications in pharmaceuticals, agriculture, industrial chemicals and other important industries. The potential for improved biotechnology-derived products and processes provides the driving force for continuing technical progress. In the long run, biotechnology could find applications in any industry involving biological processes or in which biological processes might substitute for chemical processes. Pharmaceuticals, agriculture and chemicals are the industrial sectors most often identified as primary targets of biotechnology applications in the next decade.

In pharmaceuticals and health care, biotechnology applications are expected to improve the quality and efficacy of existing products, expand production of known compounds not now available in commercially significant quantities, and create entirely new therapeutics, diagnostics and drug delivery systems. These developments may bring dramatic improvements in the diagnosis and treatment of cancer and cardiovascular and immunological diseases, among others. Although only a few biotechnology-derived products have reached the market, significant commercial payoffs are expected in the next several years.

Both animal and plant agriculture will benefit from new biotechnology-derived products and processes. In addition to improved animal vaccines, diagnostics, hormones and drugs, biotechnology will ultimately offer the capability to alter the genetic structures of cattle and other animals to improve quality and increase productivity. Similarly, genetically engineered seeds and bacteria will increase yields, improve quality, and expand potential cultivation regions for many important crops. Recent advances in agricultural applications have exceeded earlier expectations, and important commercial activity should be achieved by the late 1990's.

Industrial chemicals, particularly specialty chemicals and food additives, represent another major future target for biotechnology applications. Improvements in current bioprocessing methods and replacement of current chemical processes by new and far more efficient bioprocesses can result in lower costs and greater flexibility in the production of a vast array of organic chemicals. While potentially quite significant, the commercial impact of biotechnology on industrial chemicals will probably not be realized until early in the next century.

The direction and rate of continued progress in these and other commercial applications will depend on a number of factors, including the evolving nature of the underlying technology.

Technology Evolution

The brief history of modern biotechnology confirms that the anticipated evolution of this technology is well underway, although it is still in the emergent stages. Our research suggests the following evolutionary pattern:

Phase 1: Science (1970's) The roots of modern biotechnology lie in important earlier scientific advances, but it was the first successful cloning of recombinant DNA molecules in 1973 that most clearly signaled the technological discontinuity. Rapid scientific progress followed in leading academic research laboratories as additional biological entities were successfully engineered and improved experimental techniques were developed. A few leading scientists moved beyond their laboratories to help establish the first private biotechnology companies with the support of venture capitalists. The initial emphasis in these new companies was on building research capabilities; few established firms possessed research capabilities in the new technology in this period.

Phase 2: Technology (1980's) The introduction in 1981 of the first successful automated gene synthesizer and subsequent technical advances signaled a second important phase in the evolution of biotechnology. This transition from complex, time consuming laboratory procedures to more standardized and more efficient techniques aided the widespread diffusion of the new technology throughout academe and private industry. Hundreds of new biotechnology firms were established and many established firms expanded their technical efforts to include biotechnology. Developmental priorities increased substantially as firms attempted to translate scientific findings into products with commercial promise. Despite substantial commitments by both established and emerging firms, however, few important new commercial products have appeared.

Phase 3: Commercialization (1990's) A rapid rise in the number of commercial biotechnology products is anticipated in the next few years, signaling the beginning of the commercialization phase. Attention to commercial applications will dominate that given to the research and development efforts which received primary emphasis in earlier periods. The resulting focus on commercial applications will intensify competitive pressures. Furthermore, with the appearance of important new classes of pharmaceutical products, second generation versions of current products and initial applications to other industries (e.g., agriculture) in the 1990's, the growth stage of the biotechnology revolution will be at hand.

Participating Firms

Following this rapid evolution of biotechnology, it is certainly to be expected that the emerging and established firms involved in its development and commercialization would also change over time. Perhaps the most striking evidence of such change is the explosion in the numbers of emerging firms participating in biotechnology. From only a few firms with any commitment to the technology in the mid 1970's, this group has grown to hundreds of emerging firms dedicated to biotechnology and large number of established firms with significant biotechnology involvement.|3,4~ Of the latter group, roughly three-quarters are incumbents in one or more industries likely to be affected by biotechnology commercialization.

Further evidence of the evolving nature of biotechnology participants is provided by an analysis of the shifting priorities of one hundred and twenty emerging firms. We recently surveyed senior managers in U.S. biotechnology firms, primarily companies with a focus on genetic engineering or monoclonal antibody technology. We asked them to estimate the proportions of scientific and commercial activities in their firms and to rate the importance of research, development, production and marketing over time.

The results showed a significant increase in the proportion of commercial activities over time and a corresponding decrease in the proportion of scientific activities. This clearly reflects a shift in firm priorities consistent with the evolution of the core technology suggested above. Further evidence of the evolution of innovation activities and priorities is the finding that research activities decreased significantly in importance over time, while other innovation activities increased significantly in importance over time. The dramatic change observed in both the absolute and relative importance of production and marketing priorities was particularly striking.|5~ These results are highly consistent with the framework presented earlier.

Positioning for Innovation

Competitive conditions and requirements following the emergence of a new technology may differ significantly from those that prevailed earlier in industries impacted by the change. To exploit the emerging technology successfully, firms must create and maintain a competitive position in a highly dynamic environment. Initially, firms may be able to innovate effectively in niche applications of the new technology. In the longer term, however, firms will be successful in realizing significant economic returns only if they can access the full range of complementary assets required to commercialize the new technology. In this process, firms face an array of structural and strategic challenges typically associated with rapid growth.|6~

In attempting to position their firms for technological innovation, managers face four key technology strategy decisions: the scope, or breadth, of the technologies and markets in which the firm chooses to participate; the levels of commitment made to each; the priorities assigned to various innovation activities; and the degree of externalization of these activities. The timing of each of these decisions is extremely important and therefore also deserves explicit consideration. Decisions in each category are highly sensitive to the nature and rate of change in technologies, markets and competitive positions. As a result, these decisions-and the strategies they imply can be expected to change substantially over time.

Although decisions involving scope and commitment are clearly important in defining technology strategies, they are also quite broad in nature and have been widely discussed in the strategic management literature. The primary interest here is on decisions concerning innovation priorities and externalization as firms move toward commercialization of new technology. Technological innovation in this paper refers to the sequence of activities by which a technical idea (or "invention") is translated into a commercial reality. In the simplest model, this consists of the Research, Development, Manufacturing and Marketing activities needed for technology commercialization. Successful innovation requires that an organization has command of, or involvement in, all stages of the innovation process.

Externalization decisions, to pursue selected innovation activities with or through external agents, represent important strategic choices for participating firms. Each stage of the innovation process can be carried out internally or externally or through some combination of internal activities and external alliances. To a considerable degree, internal and external activities are complementary. If a firm contracts with another for production or marketing services, for example, the result is a reduced requirement for internal production or marketing capabilities. It may be less obvious, but no less important, that the nature and degree of complementarily is likely to change over time as the technology and firms evolve.

Empirical analyses of positioning strategies in biotechnology have been limited to date. In part, this reflects the early stage of development of the field and limited longitudinal data. However, some initial evidence of the importance of time in the positioning strategies of biotechnology firms was provided in a recent study of key technology strategy decisions about innovation priorities and externalization over time.|7~

Using cluster analysis to group sample firms according to their patterns of strategic choices, four distinctly different strategy clusters emerged. Three of the groups established similar initial positions with relatively high emphasis on R&D activities (i.e., relatively low emphasis on production and marketing). These firms also began with comparable levels of external orientation. Two of these groups of firms increased both their external orientation and relative emphasis on production and marketing activities to a similar extent over time, but differed significantly in their timing. The third group increased emphasis on production and marketing activities comparable to groups to the other two but with no overall change in external orientation. A fourth group chose to make little change in emphasis on innovation activities or external orientation.

One of the implications of this analysis is particularly relevant for the evolution of technology strategy. Not only do the strategic choices of emerging firms change over time, but they can be differentiated from one another on the basis of their patterns. This is likely to be important for subsequent longitudinal analyses.

Positioning Through Strategic Alliances

A related area of considerable recent interest to both managers and scholars is the role of strategic alliances between firms in technological innovation. Such alliances are the principal mechanisms for accessing external assets in the commercialization process. In this discussion, a strategic alliance is defined as a formal collaboration between firms which offers actual or potential strategic advantages to one or more partners.

The brief history of biotechnology has been characterized by an extensive network of alliances linking emerging biotechnology firms with both established incumbents and new entrants. For the emerging firms, these collaborations not only provide the financing to support scientific research and organizational development, but also offer access to important complementary assets such as product design and marketing resources. For the established partners, alliances with emerging biotechnology firms offer access to leading-edge technical developments in the new field. Other important benefits of such collaborative relationships include shared risks and accelerated technical progress and market entry.|8~

The inherently dynamic nature of the technology, firms and strategies associated with such strategic alliances suggests that they must also be expected to evolve over time.

This argument is based on the two principal rationales for strategic alliances which derive from the framework introduced earlier. Asset complementarity is the degree to which the assets of partners are complementary and, hence, reflects the potential offered by an alliance to broaden the asset base available to each partner. Strategy complementarity is the degree to which the strategies of partners are complementary and, hence, reflects the potential offered by an alliance to support the partners' respective strategic thrusts. Changes in either or both of these complementarities can have significant implications for the nature and role of strategic alliances in technological innovation.

As indicated earlier, the asset positions of established and emerging firms are highly complementary in the period immediately following a technological discontinuity. However, both types of firms have incentives to internalize assets which are complementary to their own, particularly those which become critical to their success as the technology advances toward commercialization.|9~

This is reflected most clearly in the efforts of leading biotechnology firms to develop their own production and marketing capabilities. In many instances, this is being accomplished by attracting experienced staff from successful incumbents. Similarly, many established incumbents and new entrants have built significant internal capabilities in biotechnology research and development by attracting scientists from academic laboratories and biotechnology firms. Acquisitions have also been used by incumbents to strengthen core technical assets, while some established new entrants have made major acquisitions of pharmaceutical companies to acquire innovation-specific complementary assets.

It follows that initial distinctions in asset positions and associated incentives for collaboration between established and emerging firms are likely to change over time and, as a result, a shift in the numbers and types of alliances linking such firms is likely to occur. Of particular interest in the biotechnology field is the trend toward more highly focused and limited cooperative arrangements (e.g., exclusive marketing arrangements for narrowly specified products and markets) consistent with partners' needs to augment internal capabilities in selected areas.

Shifts in the complementarity of strategies also influence alliances between established and emerging firms. This follows directly from the evolutionary nature of their strategies.| 10~ Combined consideration of the strategies of established and emerging firms indicates that complementarity differs across strategy combinations and is likely to decrease with the progression over time of firm strategies. Equity investments, for example, are most prevalent in the earliest phases of technology, firm and strategy evolution. Emerging firms struggling to build a new company welcome the funding, business expertise and credibility available through equity involvement by a major established firm. At the same time, the established partner finds the association with leading-edge technical programs to be of great value in understanding the scientific and commercial implications of the new technology.

This will inevitably change over time. As technical and market uncertainties decline and as strategic priorities shift for both established and emerging firms, some once compelling incentives for collaboration are likely to diminish in importance. Risk-sharing incentives, for example, will often decline with reductions in the uncertainty associated with successful commercialization and with increasing financial and organizational strength of the emerging firm. Moreover, as firms narrow their commercial focus and increase their commitments in selected markets, alliances often present problems of flexibility, control and technology protection which may further limit their attractiveness.

Thus, it can be argued that reduced complementarities in both assets and strategies over time will lead to reduced incentives for collaborations between established and emerging firms in biotechnology. Not only does this suggest that such alliances can be expected to play less important roles as the biotechnology revolution proceeds, but that proportionately fewer alliances will be formed in the future.

Management Implications

The evolution of new technology has several important implications for managers attempting to capitalize on the opportunities and/or cope with the threats presented by technological change:

1. No single firm commands the full range of resources necessary to manage an emerging technology in its early stages of development. Both established and emerging firms typically control essential assets, but even the most successful firms must look to external sources to commercialize radically new technology.

2. The strategies pursued by established and emerging firms can be expected to change as the technology and associated markets develop, reflecting increased commitments to more focused programs. Firms planning to participate in an emerging technology should anticipate and organize to manage the rapid shift in strategic emphasis over time.

3. The strategic positions of established and emerging firms are highly complementary during the early development of a new technology, but the nature and significance of this complementarity changes with shifting priorities. As a result, external alliances deserve careful consideration as mechanisms for managing discontinuous technological change, but care must be taken to tailor these collaborative arrangements to meet changing strategic requirements.

References

1. Arakaki, Emily A., "A Study of the U.S. Competitive Position in Biotechnology" in High-Technology Industries: Profiles and Outlooks - Biotechnology, Washington, D.C.: International Trade Administration, U.S. Department of Commerce, July, 1984 p.52.

2. OECD, "Biotechnology: International Trends and Perspectives, Paris: Organization for Economic Cooperation and Development, 1982.

3. Dibner, Mark D., Biotechnology Guide - U.S.A., Stockton Press, New York, 1988.

4. Bioscan - The Biotechnology Corporate Directory Service, Oryx Press, 1991.

5. Dibner, Mark, William F. Hamilton and Joaquim Vila, "The Maturing of Biotechnology Companies: Shifting Emphasis from Science to Business," Bio/Technology, Volume 6, No. 3, 1988, 276-279.

6. Hambrick, D.C. and L.M. Crozier, "Stumblers and Stars in the Management of Rapid Growth," Journal of Business Venturing, 1985.

7. Hamilton, William F., Joaquim Vila and Mark D. Dibner "Patterns of Strategic Choice in Emerging Firms: Positioning for Innovation in Biotechnology," California Management Review, Spring 1990.

8. Shan, Weijian, "Technological Change and Strategic Cooperation: Evidence from Commercialization of Biotechnology," University Microfilms, Inc., Ann Arbor, Ml, 1987.

9. Teece, David J., "Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy," in D.J. Teece, ed. The Competitive Challenge: Strategies for Industrial Innovation and Renewal, Cambridge, MA: Ballinger, 1987.

10. Hamilton, William F. "Corporate Strategies for Managing Emerging Technologies," Technology in Society, Vol. 7, 1985, pp. 197-212.

William Hamilton is Director of the Management and Technology Program and Landau Professor of Management and Technology. The Wharton School, University of Pennsylvania, Philadelphia, PA.
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Title Annotation:Symposium: Management of Technology
Author:Hamilton, William
Publication:Review of Business
Date:Mar 22, 1993
Words:3238
Previous Article:Industrial research and U.S. competitiveness.
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